What RIA sellers need to know

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Are you considering selling your RIA firm this year?

If your immediate answer is “no,” let me challenge you with some questions posed by a few of the industry's most prominent buyers, who gathered recently in Boston at the Fidelity M&A Leaders Forum.

Many owners of advisory firms believe that this is a cottage industry where they can continue to serve their clients until, well, they’re done serving them. An 80-year-old advisor recently told Steven Levitt from Park Sutton Advisors that he “doesn’t quite think he’s ready to sell.” Mark Hurley of Fiduciary Network calls this the depleting-oil-well effect.

As an RIA firm owner, you have what many consider a very sticky business: happy clients creating a steady annuity for you. That is, until you stop prospecting for new clients because you’re more interested in a lifestyle business and only want to work with your long-term clients, who at this point are likely to be your friends.

Unfortunately, as those clients get older, they begin to consume their capital and your business starts to look like a depleting oil well, as the value from your business seeps out day by day. Worse yet, we know that many firm owners lack succession and continuity plans.

If you don’t think about a sale, you could be leaving your clients — now, your friends — and your family in distress should something happen to you. Are you certain that you are thoroughly acting in your clients’ best interest? And, as Michael Nathanson, CEO of The Colony Group pointed out, unlike law or certain other professional services firms, RIA owners can use a sale of their businesses to provide better, continuous services to clients as part of a greater organization while also reaping the value of the business they’ve built.

I’ve talked about the need for a Zillow for the M&A market. While I realize that may not be a possibility, a similar service for an RIA business would help put a focus on market dynamics.

Financial markets have seen a record eight-year bull market, much like a booming neighborhood might experience a spike in real estate prices. Some of the M&A executives at the Boston event believe that this boom has created a lack of urgency for sellers.

“The status quo, or inertia, is the competition,” noted Matt Brinker, head of acquisitions for United Capital.

I get it. Why disrupt a good thing? But, while assets under management may be growing as a result of the market, organic growth — that is, true net new assets added — has been declining in RIA firms for years, down to 3% from 6% just two years ago.

So, ask yourself, are you seeing real growth? Can that growth resume after a serious market correction?

We may find that selling a firm post-market correction could be akin to selling a house following the burst of a real estate market bubble. Many overconfident RIA owners experienced an unexpected decline in their marketability and value back in 2008. Will that happen again? It’s too soon to tell at this point, particularly since we’re still experiencing some big market swings.

The new tax legislation may cause firm owners to consider some business decisions that could consume the early part of the year. Brent Brodeski, CEO of Savant Capital, predicts the new tax law could raise the cost of capital for RIA firms by nearly 10% given that EBITDA is now lower quality than the EBIDTA of other industries, meaning it's taxed higher. In addition, your clients have lost the ability to deduct their advisory fees as an itemized deduction.

While I don’t believe that fewer people will be willing to pay for advice, I do believe that these two items, in tandem, may make RIA firm leaders consider whether they want to spend their time as business owners or as advisors. I’ve seen many successful transitions where highly accomplished firm leaders decide that they want to focus on their clients and leave the bigger business decisions to someone else. Where do you want to spend your time?

The bottom line: having a strategy for when, where and why to sell is important — whether you’re going to sell in 2018 or beyond. That may be especially true in light of the continuing consolidation that M&A executives at the Boston forum are predicting.

So the question remains: will you be ready?

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RIAs M&A Succession planning Tax rules David Canter Michael Nathanson Matt Brinker Fidelity Clearing & Custody Solutions The Colony Group United Capital